To remain competitive as a leading international financial hub, Hong Kong can no longer rely on the formula of its past 'glorious' days but do something new, according to speakers at the Hong Kong Foreign Correspondents’ Club (FCC) in June. The expansion of the Special Administrative Region's (SAR's) bourse, the Hong Kong Stock Exchange (HKEX), into more territories, would be particularly helpful, according to the experts.
“What we were doing in Hong Kong’s heyday won’t be what we will be doing in five years’ time or 10 years’ time. It will be very different. Can we predict what we will be doing? It is very difficult,” said Arnold Ip at a FCC seminar on June 6.
“We need to adapt. I have no idea how the next five years will evolve. What I know for sure is that what we will be doing in the medium term will be quite different from the 1990s, the noughties or the last decade,” said Ip, the executive chairman of Altus Holdings, an investment holding company listed on Hong Kong’s Growth Enterprise Market (GEM).
“What we need to do in order to adapt is to actually to keep an open mind. Whatever reform we come up…we need to take into account all the stakeholders in the market, not just the fund managers, not just the companies, not just the retail investors but everybody,” Ip said.
Hong Kong is changing and adaptation to this reality is arguably going to be key as competition ramps up elesewhere in capital markets.
“What’s over, in my opinion, is the imagery that many still cling to in looking to the future of a prideful city - Asia’s world city, Milton Friedman’s favourite free market. The Hong Kong of old is not the Hong Kong of today, and especially not the Hong Kong of tomorrow. The title of my article [for the Financial Times] was intended as a wake-up call, an appeal for you in Hong Kong to come to grips with this seemingly harsh realisation,” said Stephen Roach, a senior fellow at the Paul Tsai China Center of the Yale Law School., also at the FCC June event.
IPO pain
Hong Kong has fallen much from its glory days. In 2018 and 2019, the city was the world’s largest initial public offering (IPO) market, but plunged to tenth place in 2023. Total IPO fundraising in Hong Kong was HK$46.3 billion ($5.93 billion) in 2023, a year-on-year decrease of 56%, according to a PwC report on January 2. PwC expects that total funds raised in IPOs for the full year of 2024 in Hong Kong will rebound and reach between HK$70-80 billion, with the first half of the year, total funds raised on the Hong Kong market reaching HK$13.1 billion – a 27% drop year-on-year.
The Hang Seng Index dropped by more than half from 30,644.73 on February 19, 2021 to 14,863.06 on October 29, 2022, below its peak in 1997, the year when Hong Kong was handed by the UK to China. The Hang Seng Index rebounded to 18,176.34 on June 11, although it has since dropped to 17,002 as of July 30. In comparison, the Nasdaq-100 surged 55.1% in 2023, its best performance since 1999, while the S&P 500 rose 26.3%.
“My premise is that without a rebound in the mainland Chinese economy, Hong Kong is unlikely to spring back to life on its own. That’s because the linkages between the PRC and Hong Kong economies have become tighter than ever,” said Roach, who was formerly the Asia head of Morgan Stanley based in Hong Kong.
Over the past 12 years, 2012 to 2023, the Chinese economy grew by an average of 6.3% annually; that was a 3.7 percentage point deceleration from the spectacular 10% pace of the preceding thirty-two years from 1980 to 2011, Roach pointed out. Growth in the Hong Kong economy has also decelerated by 3.7 percentage points, slowing from an average 5.1% pace over 1980 to 2011 to just 1.4% from 2012 to 2023, Roach added.
2024 is expected to see between 2.5% to 3.5% GDP growth, albeit in part due to the post-pandemic recovery, and a cut in interest rates from the US Fed, possibly starting in September, should help the Hong Kong dollar become a more competitive currency. The Q2 2024 GDP preliminary estimate is 3.3% helped by a boost in exports. A flagship listing such as from Hong Kong-heaquartered life insurer FWD could also help revive the IPO market this year.
Seeking foreign listings
“We’ve relied too much on China. We need to look to the region,” said Stacey Wong, president of the Association of Hong Kong Capital Market Practitioners Limited, at the FCC seminar.
The Chinese economy is not going to revive soon, while Sino-US tensions are going to continue for two more years at least, predicted Wong, who is also chief operating officer of Quam Plus International Fund, a Hong Kong-listed financial services group. “So we need to look at new products," argued Wong.
The new products Hong Kong can offer include overseas Renminbi products, Wong suggested. The recent reappointment of Eddie Yue as chief executive of the Hong Kong Monetary Authority by Hong Kong's financial secretary for another five years cited the importance of Hong Kong as an offshore Rmb hub.
The HKEX has been doing a lot of work in visiting Cambodia, Indonesia and Malaysia in an effort to attract companies in these countries to list in Hong Kong, said Wong. “But it takes time for them to come.”
“The exchange has been extremely proactive whether it’s going to the Middle East and whether it’s visiting countries in the region,” said Renu Bhatia, chairman of the listing committee of the HKEX, at the FCC seminar.
Ip learnt from a recent trip to Southeast Asia (SE Asia) that many Malaysian companies are looking to Hong Kong’s capital market.
Indonesia, Vietnam and Philippines are exciting markets where companies need to raise capital, said Richard Winter, a senior advisor of Quam Plus International Financial, at the FCC seminar. Hong Kong can create a new market to raise funds for these regional companies, suggested Winter, who is also a member of the Hong Kong Securities and Futures Commission (SFC) Takeovers and Mergers Panel.
Bilateral trade between Hong Kong and Asean reached $144.6 billion last year and this week the Hong Kong government visited Laos and signed 12 memoranda of understanding during the delegation's visit, indluding across financial serives and trade.
Foreign companies find Hong Kong expensive as a venue to list with uncertainty on whether they can successfully list, Ip pointed out. “These are the problems we need to address. Once we can address those problems, Hong Kong will come back.”
Governments will try to convince companies in their countries to raise funds in their countries, so the HKEX needs to look into what will convince companies in these countries to tap the Hong Kong capital market, said Wong.
The HKEX can offer secondary listings for larger foreign companies which are already listed in their countries, said Bhatia. If a foreign firm gets into the Hang Seng Index, the firm will have the possibility to get into Stock Connect, then mainland Chinese investors can buy these companies’ Hong Kong shares through Stock Connect, said Bhatia. “That is one huge benefit they have.”
With additional reporting from Andrew Tjaardstra. The story has been updated to include the Q2 2024 GDP figures.
